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Picture Courtesy: Indian Express

Context:

A government panel, including officials from the Commerce Ministry, Industry Ministry, NITI Aayog, and exporter representatives, is working on new norms for Special Economic Zones (SEZs). The aim is to boost manufacturing and allow SEZ units to sell in the domestic market, amid rising US tariffs that have made exports uncompetitive.

What are Special Economic Zones (SEZs)?

Special Economic Zones (SEZs) are geographically demarcated areas within a country that operate under a distinct set of economic laws and regulatory frameworks, designed to attract investment, boost exports, promote industrialization, and generate employment. They provide a liberalized business environment with incentives such as tax holidays, duty-free imports, simplified customs procedures, and relaxed labour regulations. 

Importance of SEZs:

• Economic Growth: SEZs are intended to accelerate industrialization and contribute to GDP growth by attracting domestic and foreign investment. 

• Export Promotion: By offering duty-free imports and other export-related incentives, SEZs help firms become globally competitive. 

• Employment Generation: SEZs create jobs directly in manufacturing, IT, and services, and indirectly in logistics, supply chain, and ancillary industries. 

• Technology Transfer & Innovation: Many SEZs focus on high-value sectors like IT, electronics, pharmaceuticals, and gems & jewellery, encouraging R&D and technology adoption. 

• Regional Development: Strategically located SEZs can drive infrastructure growth and economic development in underdeveloped regions. 

Current Status of SEZs in India:

• India has 276 operational SEZs across sectors like IT/ITES, gems & jewellery, textiles, and electronics (Commerce Ministry, FY25).
• Exports from SEZs reached $172 billion in FY25, while domestic sales remain just 2% of total SEZ output, highlighting the focus on export-led growth.
• Gems and jewellery form a major share, contributing nearly 65% of India’s studded jewellery exports from SEZs.

Picture Courtesy: SEZ INDIA

Why there is a need for new norms for SEZs?

Shift in Global Trade Dynamics: SEZs were originally designed to promote export-led growth, but changing global trade policies, tariffs, and protectionism have created challenges. For instance, recent US tariffs on certain Indian exports, especially in the gems & jewellery sector, have reduced the competitiveness of SEZ-produced goods. Many SEZ units, which primarily catered to the US market, have reported that their exports have become unviable, forcing them to request de-notification to operate in the domestic market.

Underutilization of Capacity: SEZ units often operate below capacity due to seasonal fluctuations in export demand. Equipment, labor, and production infrastructure remain underutilized for significant parts of the year. Introducing new norms, such as allowing SEZs to serve the Domestic Tariff Area (DTA) through “reverse job work,” can enhance efficiency and optimize resource use.

Low Domestic Market Integration: Currently, domestic sales from SEZs constitute only 2% of total production (FY25 data, India’s 276 SEZ units). This indicates that SEZs are heavily export-dependent. New norms can allow SEZs to participate more in the domestic market, balancing domestic demand with export focus, and reducing vulnerability to global trade shocks.

Need for Technological Upgradation and R&D: Many SEZs face low investments in research and development and skill development. For example, a survey of 14 gems & jewellery SEZ units revealed that only 4 reported any R&D investment. New norms can incentivize innovation, technology adoption, and skill enhancement, making SEZs more competitive globally.

Enhancing Competitiveness: India’s SEZs lag behind global peers like China and Vietnam, where SEZs are more diversified and technologically advanced. For instance, China’s SEZs transformed Shenzhen from a small town into a global manufacturing hub, attracting massive FDI and boosting exports. India’s SEZs need reform to improve competitiveness, attract FDI, and strengthen export performance.

Addressing Negative Trade Balance in SEZs: Some sectors, like gems & jewellery, face rising imports of raw materials, creating a negative trade balance. New SEZ norms can help balance this through better regulation of import-export flows and integration with domestic industries.

Policy Flexibility and Faster Implementation: Delays in passing the SEZ Bill and rigid regulations have hindered reforms. A new set of norms can provide faster policy implementation, address sector-specific challenges, and safeguard jobs amid global uncertainties.

Way Forward:

Diversify Market Access

• Current issue: Indian SEZs are heavily export-focused, with domestic sales forming only ~2% of total production.
• Way forward: Introduce policies like reverse job-work, allowing SEZ units to serve the domestic tariff area (DTA). This would reduce idle capacity, stabilize revenue, and make SEZs more resilient to global shocks.

Promote Technological Upgradation and R&D

• Current issue: Many SEZ units, particularly in gems and jewellery, invest minimally in R&D. Only 4 out of 14 surveyed units reported any significant R&D activities.
• Way forward: Offer fiscal incentives, grants, and collaborations with technology incubators to boost innovation, digitalization, and automation, making SEZs globally competitive. 

Strengthen Skill Development

• Current issue: Limited training opportunities and gaps in technical skill development hinder productivity.
• Way forward: Launch sector-specific training programs, particularly for high-value manufacturing sectors, leveraging industry-academia partnerships. 

Attract Strategic FDI

• Current issue: FDI in SEZs has been low due to policy perception, limited protection agreements, and marketing gaps.
• Way forward: Simplify investment processes, sign bilateral agreements to protect foreign investments, and promote branding and marketing of SEZ clusters to global investors. 

Policy Flexibility and Faster Approvals

• Current issue: Long pending SEZ bills and regulatory bottlenecks slow down adaptive reforms.
• Way forward: Introduce dynamic policy frameworks with faster approval mechanisms for SEZ modifications, DTA access, and tax incentives. For example, aligning fiscal benefits with domestic industry fairness while avoiding bottlenecks. 

Conclusion:

Special Economic Zones (SEZs) have been vital for India’s exports, investment, and employment, but rising global tariffs and structural inefficiencies have exposed their limitations. With domestic sales at only 2% of production and low R&D and skill development, many SEZ units struggle to remain competitive.

Reforms like reverse job work, enhanced R&D, skill development, strategic FDI, and streamlined policies can make SEZs more flexible and resilient. Balancing export focus with domestic market integration and innovation will help SEZs sustain growth, protect jobs, and strengthen India’s manufacturing ecosystem in a changing global economy. 

Source: The Indian Express